Worksheet Solutions: Financial Market | Business Studies (BST) Class 12 - Commerce PDF Download

Multiple Choice Questions (MCQs)

Q1: What is the primary function of a financial market?
A) To provide loans to individuals
B) To facilitate the transfer of funds from savers to borrowers
C) To regulate interest rates
D) To control inflation

Ans: B) To facilitate the transfer of funds from savers to borrowers

The primary function of a financial market is to channel funds from those who have excess savings (savers/investors) to those who need funds for productive use (borrowers, businesses, or governments).

Q2: Which of the following is NOT a type of money market instrument?
A) Treasury Bill
B) Commercial Paper
C) Equity Shares
D) Certificate of Deposit

Ans: C) Equity Shares

• Money market instruments deal with short-term (less than one year) borrowing and lending.

• Treasury Bills, Commercial Paper, and Certificates of Deposit are short-term financial instruments.

• Equity Shares represent ownership in a company and are part of the capital market, not the money market.

Q3: What does the capital market primarily deal with?
A) Short-term funds
B) Long-term funds
C) Daily transactions
D) Currency exchange rates
Ans: B) Long-term funds

• The capital market deals with long-term investments like stocks and bonds.

• It provides funds for business expansion, infrastructure projects, and corporate growth.

• In contrast, the money market handles short-term financial instruments.

Q4: Which institution is responsible for regulating the securities market in India?
A) Reserve Bank of India
B) Securities and Exchange Board of India
C) Bombay Stock Exchange
D) National Stock Exchange
Ans: B) Securities and Exchange Board of India

• SEBI is the regulatory body that oversees the securities market in India. It ensures that the market functions in a fair and transparent manner, protecting investors and promoting the growth of the securities market.

• The Reserve Bank of India (RBI) deals with monetary policy and banking regulation, not securities.

Q5: What is the main purpose of a stock exchange?
A) To provide loans to companies
B) To allow companies to raise funds
C) To help investors buy and sell securities
D) Both B and C
Ans: D) Both B and C

• The primary purpose of a stock exchange is to help companies raise funds by issuing securities like stocks and bonds (B).

• It also facilitates the buying and selling of securities for investors (C), providing liquidity and a platform for trading.

• So, both raising funds and enabling transactions between buyers and sellers are key functions of a stock exchange.

Fill in the Blanks

Q1: The process of converting a share certificate from physical form to electronic form is called __________.
Ans: Dematerialisation

Q2: The __________ market deals with short-term funds and monetary assets with a maturity period of up to one year.
Ans: Money

Q3: The __________ is where securities are sold for the first time to raise long-term capital.
Ans: Primary market

Q4: SEBI was established in __________ to protect the interests of investors.
Ans: 1988

Q5: A __________ is a short-term unsecured promissory note issued by creditworthy companies.
Ans: Commercial Paper

True or False

Q1: The capital market only deals with short-term financial instruments.
Ans: False

Q2: The National Stock Exchange was established in 1992.
Ans: True

Q3: Liquidity in a financial market allows investors to easily buy and sell assets.
Ans: True

Q4: Commercial bills are used to finance long-term investments.
Ans: False

Q5: SEBI's primary role includes protecting the rights and interests of investors.
Ans: True

Short Answer Questions

Q1: What is a financial market?
Ans: A financial market is a place where people can buy and sell money and things like stocks. It helps people save money and also helps businesses get money to grow. This is good for the economy because it helps create jobs and make things better for everyone.

Q2: What are the two main types of financial markets?
Ans: The two main types of financial markets are the money market and the capital market. The money market deals with short-term money, while the capital market focuses on long-term money for things like stocks and bonds.

Q3: What is a stock exchange?
Ans: A stock exchange is a place where people can buy and sell shares of companies. It helps companies find money to grow and gives people a safe way to invest their money and sell their shares when they want.

Q4: What does SEBI do?
Ans: SEBI is an organization that protects investors and makes sure the stock market is fair. It helps to prevent cheating and ensures that people who buy and sell stocks can trust the market to be safe and honest.

Q5: What is dematerialisation?
Ans: Dematerialisation is the process of changing a physical share certificate into an electronic form. This makes it easier to buy, sell, and keep track of shares without needing paper certificates.

Long Answer Questions

Q1: What are the primary functions of financial markets, and how do they contribute to economic growth?
Ans: Financial markets serve several critical functions crucial for economic development. Here are the primary functions:

• Mobilization of Savings: Financial markets gather savings from individuals and institutions. This process is essential as it directs funds to productive investments, creating jobs and fostering economic growth.
• Facilitating Price Discovery: These markets determine the prices of financial assets through supply and demand. Accurate price discovery reflects the true value of assets, guiding investors in making informed decisions.
• Providing Liquidity: Financial markets ensure that assets can be easily bought or sold. This liquidity is vital for investors, allowing them to convert investments into cash without significant delays or losses.
• Reducing Transaction Costs: They minimize costs associated with trading by providing necessary information about securities. Lower transaction costs encourage more trading and investment.
• Risk Management: Financial markets allow investors to hedge against risks through various financial instruments. This management of risk leads to a more stable economic environment.

Q2: Compare and contrast the money market and the capital market in terms of instruments, participants, and purposes.
Ans: The money market and capital market are two essential components of financial markets, each serving different purposes and featuring different instruments and participants. Here are the key differences:

• Instruments: The money market deals with short-term instruments like Treasury Bills and Commercial Papers, while the capital market focuses on long-term instruments such as stocks and bonds.
• Maturity Period: Money market instruments typically have a maturity of one year or less, whereas capital market instruments have longer maturities, often exceeding one year.
• Participants: Major participants in the money market include banks, financial institutions, and corporations seeking short-term financing. In contrast, the capital market attracts individual investors, corporations, and institutional investors looking for long-term investment opportunities.
• Purpose: The primary purpose of the money market is to provide liquidity and meet short-term funding needs, while the capital market aims to raise long-term funds for growth and expansion.
• Market Dynamics: The money market is characterized by lower risk and lower returns, suitable for conservative investors. The capital market, while riskier, offers the potential for higher returns over time.

Q3: Explain the role of stock exchanges in the financial market and their importance to investors and companies.
Ans: Stock exchanges play a vital role in the financial market by providing a platform for buying and selling securities. Here are the key aspects of their role:

• Liquidity: Stock exchanges provide liquidity, making it easy for investors to buy and sell securities. This liquidity ensures that investors can access their funds when needed.
• Price Determination: They facilitate price discovery through the forces of supply and demand. This process ensures fair pricing of securities, enabling informed investment decisions.
• Transparency: Stock exchanges operate under strict regulations, ensuring transparency in transactions. This transparency helps protect investors and promotes trust in the market.
• Access to Capital: Companies use stock exchanges to raise capital by issuing shares. This access to capital is crucial for business expansion and growth.
• Investor Education: Stock exchanges often provide educational resources to help investors understand the market. This education empowers investors to make better financial decisions.

Q4: Discuss the significance of SEBI in regulating the securities market and protecting investors.
Ans: The Securities and Exchange Board of India (SEBI) plays a crucial role in maintaining order in the securities market. Here are the key points regarding its significance:

• Regulatory Authority: SEBI regulates stock exchanges and the securities industry, ensuring fair practices. This regulation protects investors from malpractice and fraud.
• Investor Protection: SEBI's primary objective is to safeguard the interests of investors. It implements measures to prevent insider trading and other unfair practices, thus enhancing investor confidence.
• Market Development: SEBI promotes the development of the securities market by facilitating efficient capital mobilization. It encourages innovation and competition among market participants.
• Training and Education: SEBI conducts training programs for intermediaries and investors, improving overall market knowledge and practices. This education helps create a more informed investor base.
• Monitoring Market Practices: SEBI continuously monitors market activities to ensure compliance with regulations. This monitoring is vital for maintaining market integrity and investor trust.

Q5: Describe the process of trading in a stock exchange, including the role of brokers and the importance of technology.
Ans: The trading process in a stock exchange is structured and relies heavily on technology. Here are the main steps involved:

• Registration with a Broker: Investors must first register with a broker or sub-broker. This involves providing personal information and opening a Demat account to hold shares electronically.
• Placing Orders: Once registered, investors can place buy or sell orders through their broker. The broker uses a computer terminal connected to the stock exchange to execute these orders.
• Matching Orders: The broker matches orders with the best available prices in the market. This process is facilitated by advanced trading platforms that ensure efficiency and speed.
• Trade Confirmation: After a trade is executed, the broker issues a trade confirmation slip and a contract note to the investor. This documentation is essential for record-keeping.
• Settlement of Transactions: Finally, the settlement process occurs, where shares are transferred to the buyer's Demat account, and payment is made to the seller. Efficient technology ensures timely settlement and reduces risks of default.